ConocoPhillips' Unique Strategy in the Shale

Most drillers in the shale try to maximize profitable production to the greatest extent that the debt and equity markets will allow. While that approach has worked so far, ConocoPhillips has employed a different strategy in the Eagle Ford and Bakken, with some interesting results.

It's no secret that the biggest oil companies have largely missed out on the shale revolution. Consider Chevron Corporation's(NYSE:CVX) most recent earnings conference call, where one analyst openly wondered why, despite Chevron's huge position in the Permian basin (which sits atop the emerging Wolfcamp shale play), the company wasn't very gung ho. Most of the world's biggest oil companies already had major capital commitments elsewhere when many shale plays were discovered, and these companies just haven't been nimble enough to be major players in the shale.

Smaller, independent companies are the ones that took advantage of the shale. Names like Continental Resources (NYSE:CLR) and Carrizo Oil & Gas (NASDAQ:CRZO) were among the earliest movers, and they are now developing their acreage as furiously as the bond and equity markets will let them.

In the current paradigm, ConocoPhillips'(NYSE:COP) strategy sticks out like a sore thumb. Or, rather, a healthy thumb. Unlike the super-majors, ConocoPhillips moved early into the shale. Thanks to that, the company now has an enviable 200,000-plus acre position in the Eagle Ford and a solid 600,000-plus acre position in the Bakken with three other shale plays currently being appraised.

While ConocoPhillips wisely chose to do things differently from the super-majors, the company's strategy is also markedly different from the independent names. Unlike the smaller names, ConocoPhillips has balanced accelerated production with value, and this has yielded some interesting results.

A tempered approachAs the graphic above demonstrates, ConocoPhillips has balanced the drive for growth with an effort to optimize. In this case, optimization is maximizing margins and slowing down to get higher ultimate recovery rates and more efficient operations.

In the shale, as with basin drilling a generation ago, improving technology allows for lower drilling costs, higher oil recovery rates, and longer-lived wells. Over the past few years, it seems that shale drilling and operating techniques have improved across the board, prompting companies and agencies to vastly change initial estimates of steep declines and high capital costs. ConocoPhillips foresaw this trend; and unlike most of the other shale players, it decided to temper its drilling program and focus on applying the latest and greatest technologies.

In the shale, this meant several things. ConocoPhillips optimized proppant density (fracking sand), which led to a 30% increase in ultimate recovery. The company is constantly enhancing fracture stimulation design. ConocoPhillips has extensively rolled out multi-pad drilling, and 75% of Eagle Ford wells now benefit from this. ConocoPhillips has also leveraged its size to realize contract savings with servicers. ConocoPhillips is one of the few companies in the Eagle Ford, perhaps the only one, that optimizes drilling performance in real time. The company's Eagle Ford operations center is unique, and the use of this center has made well shut-ins virtually nonexistent.

Courtesy of investor relations

Eye-opening resultsThe results of ConocoPhillips' efforts are best summed up in the above chart. Of all its peer companies operating in the shale, ConocoPhillips' cost base is the very lowest. And that is not an isolated data point by any means: ConocoPhillips also yields the highest oil rates per well and achieves the highest net present value per acre among its peers in the Eagle Ford.

Closing thoughtsConocoPhillips' approach in the shale is different from that of its smaller peers. While ConocoPhillips hasn't grown production as fast as many others, it has maximized value better than anyone else in the shale by waiting to improve efficiencies before drilling some of its acreage. In the Eagle Ford especially, ConocoPhillips will enjoy high-margin growth for years to come.